Residence and domicile

There are changes to the residence provisions and many changes relating to taxation of the income and capital gains of non domiciliaries. The taxation treatment of the income and gains of offshore trusts has also changed. The main points follow, not all of which are the same as in the pre Budget Report.

Day counting rules

There have been changes since the proposals made at the pre Budget Report.

On or after 6 April 2008 any day where an individual is present in the UK at midnight will be counted as a day of presence in the UK for resident test purposes.

There will be an exemption for passengers who are in transit between two places outside the UK. For example, individuals might fly into the UK and leave by train or ferry. As a concession, if they are in the UK at midnight, they will not be counted as being in the UK for a day for the purposes of the residence test, so long as they did not engage in activities in the UK. If they attended a business meeting which are to a substantial extent unrelated to their passage through the UK. If they attended a business meeting then the exemption might not apply.

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Annual £30,000 charge for some users of the remittance basis

Currently UK residents who are either not domiciled or not ordinarily resident in the UK can access the remittance basis of taxation without any UK tax being charged on the foreign income and gains they leave outside the UK. So the remittance basis means that income and gains arising overseas are only taxed in the UK when they are brought into the UK. On or after 6 April 2008, non-domiciled and/or not ordinarily resident adults, who have been resident in the UK more than seven of the past 10 years, will have to pay a £30,000 annual tax charge in respect of the foreign income and gains they leave outside the UK, unless their remitted foreign income and gains are less than £2,000. Redefining the annual charge as a levy on unremitted income and gains should ensure that it qualifies for double taxation relief.

This £30,000 charge is in addition to any tax on UK income and gains or foreign income and gains remitted. Individuals paying the charge can choose what unremitted income or gains the £30,000 is paid on, and those income/gains will not be taxed again if and when they are eventually remitted to the UK.

Individuals under 18 will not have to pay the charge.

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Personal allowances and the remittance basis

On or after 6 April 2008 individuals who claim the remittance basis, unless they have unremitted foreign income and gains of less than £2,000 a year, will not be entitled to any of the personal income tax allowances. This includes the basic personal allowance and age-related allowances, blind person's allowance, tax reductions for married couples and civil partners and relief for life assurance payments. Remittance basis users will also lose access to the annual exempt amount for capital gains. There is only one condition - if you fail it you lose both income tax and CGT allowances.

Individuals can choose each year whether they want to be taxed on the remittance basis or on their worldwide income and gains. In the year they choose the latter they will be entitled to the personal income tax allowances and the annual exempt amount for capital gains.

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Closing loopholes in the remittance basis

Where the remittance basis has been claimed for a year, income of that year will be liable to tax for that year even where the source of the income has ceased in a previous year.

Money, property and services derived from foreign income and brought into the UK will be treated as a remittance and will be taxed as such.

There will be exemptions for personal effects, assets costing less than £1,000, assets bought into the UK for repair, assets in the UK for less than a nine month period and works of art bought into the UK for public display.

Any asset purchased out of untaxed foreign income, and owned at 11 March 2008 is exempt from a charge under the remittance basis for so long as that individual owns it even if the asset is currently outside the UK and is later imported. Similarly any asset in the UK on 5 April 2008 is exempt from the charge for so long as the current owner owns it even if that asset is exported and later re-imported. The tax charge previously arising on the sale of such an asset in the UK will remain in place.

Foreign savings and investment income arising in a year in which the remittance basis is claimed will be taxed if it is remitted to the UK irrespective of the year in which it is remitted and whether or not a claim to the remittance basis is made in the year in which the remittance is made.

There will be legislation introduced to determine how much of a transfer from a mixed fund is to be treated as income or chargeable gains.

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Non resident trusts

Trustees will be able to make an irrevocable election to rebase assets held at 6 April 2008 for the purpose of excluding any part of a chargeable gain relating to the period before 6 April 2008 from being taxed on non-domiciled beneficiaries.

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Non resident companies

UK participators of a non-UK resident company will be taxed on the chargeable gains accruing to the company irrespective of the participator's domicile.

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Offshore mortgages

In future generally where a loan from an offshore institution is advanced to the UK the interest payable on that loan will be treated as a remittance if paid out of untaxed foreign income. There is some transitional relief where the loan is already in existence and will generally last for the period of the loan or until 5 April 2028 whichever is the earlier.

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